Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 41

High-Low Method, Scattergraph

Cubicle Solutions sells productivity software such as word processors, spreadsheets, and personal information managers. Cubicle prides itself on customer support and maintains a large call center where customers can call in with technical questions about the installation and use of Cubicle products.

Monthly data on the number of support calls and call center costs for the last year have been collected and are shown below (all activities and costs are in thousands):

Month	Support Calls	Call Center Cost
1	37	$528
2	53	690
3	45	590
4	39	535
5	61	720
6	47	610
7	44	590
8	48	620
9	55	700
10	40	545
11	42	565
12	41	550

Required

a. Estimate the monthly fixed costs and the unit variable cost per support call using the high-low estimation method.

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b. Draw a scattergraph relating call center costs to the number of support calls.

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c. Considering your scattergraph, how much confidence do you have in your estimate from requirement (a)?

Step 1 of 5

Cost estimation

Cost estimation is an important exercise because it helps managers in decision making. Correct cost estimates result in cost saving and making business successful. Cost estimates helps managers to evaluate and choose the best alternative. It is important for managers to capture the correct cost for each alternative.

There different methods used for cost estimation like engineering, accounting and statistical analysis.

High-low method of cost estimation

Under High-low method of cost estimation, variable cost is calculated by considering the total cost at highest and lowest level. The difference of total cost at highest and lowest activity level are divided by the difference of highest and lowest activity level to calculate variable cost per unit. This method compensates the price instability by considering the highest and lowest level of total cost and the activity level at those two points. Same way fixed cost is calculated by deducting variable cost at lowest activity level from total cost at lowest activity level.

Scatter graph

This graph indicates the relationship between cost and volume which based on past knowledge. Scatter graph considers all data points and develops a pattern of data points and provide rough estimation of cost. This graph also indicates fixed and variable of costs with activity level. It also shows the activity level where the relationship between cost activity level changes.